The 2Q2019 GDP of 6.2% is the lowest since 1992 due to the effects of a prolonged trade war with the US, deleveraging, and structural weakness in China’s banking system. This brings 1H2019 GDP to 6.3% y/y. Although some of the June numbers like industrial production, fixed investment assets and retail sales showed bright spots, still we feel the 2Q numbers remain less than exciting.

We expect 2H2019 to remain challenging from the trade war, deleveraging blows and structural weakness in the banking system. Thus, we maintain our 2019 GDP growth at 6.2%, with the downside at 5.8%–6.0% if trade talks collapse. Also, we expect the PBoC will continue its easing policy in 3Q2019 with a further cut in the reserve requirement ratio and even the policy interest rate. Besides, we expect Beijing to unveil more stimulus measures to stabilize growth, including boosting infrastructure spending.

• Economic growth slumped to its lowest level in nearly three decades from the effects of a prolonged trade war with the US, deleveraging, and structural weakness in China’s banking system. GDP in 2Q2019 grew 6.2% y/y, the slowest reported since 1992 from 6.4% y/y in 1Q2019. This brings 1H2019 GDP to 6.3% y/y.

• But June’s numbers like industrial production rose to 6.3% from 5.0% in May. It somewhat reflects a similar trend in 2017 when IP rebounded towards the end of a quarter only to disappoint immediately after. Fixed asset investment increased to 6.3% in June from May’s 4.4% due to infrastructure spending while retail sales improved to 9.8% in June from 8.6% in May, supported partly from tax cuts and online shopping festival in June.

• Meanwhile, exports contracted by 1.3% y/y in June from a gain of 1.1% y/y in May as the front-loading exercise ends in June after US slapped tariffs on US$200bil of Chinese goods from 10% to 25% in May. Imports declined albeit at a slower pace of 7.3% y/y in June compared to -8.5% y/y in May.

• On the whole, we feel the 2Q2019 GDP numbers are less than exciting. And June’s figures remain less convincing. Also, we expect 2H2019 to remain challenging from trade war and deleveraging blows, and structural weakness in the banking system. Thus, we maintain our 2019 GDP growth at 6.2% with the downside at 5.8%–6.0% if trade talks collapse.

• Hence, we expect the PBoC will continue its easing policy in 3Q2019 with a further cut in the reserve requirement ratio and even the policy interest rate. Besides, we expect Beijing to unveil more stimulus measures to stabilize growth, including boosting infrastructure spending. The authorities have been busy over the past few months engaging targeted easing such as to households and struggling private sector to inject credit across the board. But focusing on targeted approach alone is inadequate to cushion the economy from trade war and deleveraging blows.

Source: AmInvest Research - 16 Jul 2019